Wilson Sonsini annually publishes the Silicon Valley 150 Corporate Governance Report, which summarizes the governance practices of the Valley’s largest public companies. The report uses the Lonergan SV1501, which includes the top 150 public companies (by annual sales) with headquarters in Silicon Valley. We will be publishing our 2022 report in early 2023, but we wanted to share some early data points.
Defensive measures are measures included in a company’s certificate of incorporation or bylaws that discourage hostile takeovers. These measures tend to place power in the hands of the board as opposed to stockholders, so that the board can control negotiations with a potential acquirer. Stockholders, however, dislike that defensive measures take control away from them, and they endeavor to gradually weaken them over time. Accordingly, larger companies and those farther in time from their initial public offerings (IPOs) tend to have fewer defensive measures. Set forth below are statistics on the prevalence of a classified board structure and dual or multi-class common stock among the Silicon Valley 150 (SV150) companies.
Companies with classified boards, also referred to as staggered boards, stagger director elections over a three-year period, with approximately one-third of the directors subject to re-election each year.
Overall, 80 of the SV150 companies, or approximately 53 percent, have a classified board. When viewed by years since IPO, the data indicates that the prevalence of classified boards is inversely related to the number of years that the company has been public. Thus, the percentage of companies with classified boards decreases as the years since IPO increases. The difference is considerable at the opposite ends of the spectrum: 82 percent of companies that have been public less than five years have classified boards compared to only 10 percent of companies that have been public for 20 or more years. When viewed by size of company (based on annual sales), only 26 percent of the largest companies (ranked 1-50 in terms of annual sales) have a classified board. This jumps to 64 percent for the middle tier of companies (51-100) and 70 percent for the smallest companies (101-150).
Dual or Multi-Class Common Stock
In companies with dual or multi-classes of common stock, shares held by the public carry one vote (or in some cases zero votes) per share while shares held by pre-IPO investors carry multiple votes per share, giving more voting control to founders, employees, and other pre-IPO investors. Many companies that implement a dual or multi-class structure include a sunset provision where the high-vote shares fall away upon the occurrence of a specified condition or event, or a specified time period.
Overall, 41 of the SV150 companies, or approximately 27 percent, have dual or multi-class common stock, with newer public companies more likely to have this structure. Fifty-six percent of companies that have been public less than five years have dual or multi-classes of common stock, while only 2.5 percent of companies that have been public for 20 or more years have this structure. When viewed by size of company (based on annual sales), only 18 percent of the largest public companies (ranked 1-50 in terms of annual sales) have this structure, but the remaining two tiers of companies (51-100 and 101-150) have equal numbers of companies with dual or multi-class common stock structures (both at 32 percent). Of the 41 total SV150 companies with dual or multi-class common stock, 37 have a sunset provision and four do not.
1 For more information on the methodology used to prepare the Lonergan SV150, please visit https://lonerganpartners.com/2022-lonergan-silicon-valley-150-list.